Working Papers

Banking and the Social Contract

Mehrsa Baradaran — Wed, 27 Feb 2013 11:42:10 PST

This article asserts that there exists today and has always existed an interdependent relationship between banks and the state. I refer to this connection and its mutual benefits and responsibilities as a social contract. When Alexander Hamilton responded to President Washington’s inquiry about the advisability of a national bank, he wrote that “such a Bank is not a mere matter of private property, but a political machine of the greatest importance to the State.” This social contract has existed since the inception of banking in the United States and has been reinforced over time, but it has recently become weakened due to the growing size and political power of a few banks. This article for the first time tracks the evolution of the social contract in banking from Alexander Hamilton’s first push for banking to the recent bailout of the nation’s banks. The article explores why it is that banks and governments are bound together, why the relationship is inevitable, and how it has gone awry. The article then proposes that given the transformed banking landscape, the social contract needs to be reestablished. The social contract should focus on the three main needs of the public: bank safety, consumer protection, and access to credit. The article also provides an analysis of the major banking legislation since the New Deal that lend textual support for the proposition that banks are tasked with a public purpose. This analysis involves a first-hand search through hundreds of banking agency decisions that have articulated a “public benefit” test, and tracks how this test has changed through time and has been diluted in the last 30 years.

The Originalist Case for the “Individual Mandate”: Rounding out the Government’s Argument in the Health Care Case

Dan T. Coenen — Wed, 09 May 2012 07:29:20 PDT

The Supreme Court has now received the briefs and heard the oral arguments in the landmark case that concerns the federal health care law. Much attention has focused on the law’s minimum coverage provision, or so-called “individual mandate,” and in particular its constitutionality under the Commerce Clause and the Necessary and Proper Clause. This Article offers two observations about the arguments made to the Court on that issue. First, it shows that the challengers of the minimum coverage provision adopted a strategy of emphasizing originalist reasoning, while the federal government focused its defense of the law on practical considerations and modern precedents. This difference in tactics, it is suggested, may prove to be of great consequence to the outcome of the case in light of the current Court’s marked receptivity to originalist analysis. Second, the Article suggests that – contrary to the impression created by the submissions of the parties – there are in fact powerful originalism-based reasons for concluding that the minimum coverage provision is constitutional. Indeed, according to the treatment offered here, these arguments have their roots in in all key elements of originalist discourse – the text of the Constitution, the background understandings that gave rise to the relevant clauses, and early congressional and judicial precedents. To be sure, different observers who take different views of constitutional analysis will reach different conclusions about the constitutionality of minimum coverage provision. But this Article contends that originalism-based arguments that were not fully aired before the Court cut strongly in favor of the provision’s constitutionality.

Criminal Procedure Chrestomathy

Donald E. Wilkes Jr. — Fri, 04 May 2012 12:38:14 PDT

It was the spirit of liberty which gave us our armed strength and which made our men invincible in battle. We know now that the spirit of liberty, the freedom of the individual, and the personal dignity of man are the strongest and toughest and most enduring forces in all the world .--Here's Harry! Candid Quips and Quotes from the Remarkable Mr. Truman (1976) (from a speech by President Harry S. Truman in September 1945 following the signing of the Japanese surrender).

Iminicus Libertatis: Chief Justice Rehnquist's Majority or Plurality Opinions in the Field of Criminal Procedure

Donald E. Wilkes Jr. — Fri, 04 May 2012 12:38:12 PDT

"One could account for perhaps ninety percent of Chief Justice Rehnquist’s bottom line results by looking, not at anything in the United States Reports , but rather at the platforms of the Republican Party." – Tushnet, A Republican Chief Justice , 88 Mich. L. Rev. 1326, 1328 (1990) (footnote omitted).

Arbitration and Consumer Credit

Peter B. Rutledge et al. — Wed, 14 Mar 2012 13:02:02 PDT

This paper uses a newly available database of consumer credit card agreements to take the first, in-depth empirical look at why credit card issuers use arbitration clauses. Based on a sample of credit card agreements made available by 298 issuers under the Credit Card Accountability Responsibility and Disclosure Act of 2009, it finds that while most credit card loans outstanding (95.1%) are subject to cardholder agreements with arbitration clauses, the substantial majority of credit card issuers (247 of 298, or 82.9%) do not use arbitration clauses in their credit card agreements. The paper also finds that credit card issuers are more likely to use arbitration clauses when they (1) specialize in making credit card loans; (2) make riskier credit card loans; and (3) have a larger credit card portfolio. Conversely, issuers are less likely to use arbitration clauses when they are (1) mutually owned (i.e., credit unions) rather than shareholder-owned (i.e., banks); and (2) are located in states in which class arbitration waivers are unenforceable. These empirical findings have potentially important implications for a number of timely policy questions, such as: what sorts of options are available to consumers who wish to obtain a credit card that is not subject to an arbitration clause; how increased regulation of arbitration (whether by Congress or by the Consumer Financial Protection Bureau) might affect the market for consumer credit; and how businesses are likely to respond to the Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion.

Contract and Choice

Peter B. Rutledge et al. — Wed, 14 Mar 2012 13:02:00 PDT

This paper contributes to an ongoing debate, afoot in academic, legal and policy circles, over the future of consumer arbitration. Utilizing a newly available database of credit card agreements, the article offers an in-depth examination of dispute resolution practices within the credit card industry. In some respects, the data cast doubt on the conventional wisdom about the pervasiveness of arbitration clauses in consumer contracts and the presence of unfair terms. For example, the vast majority of credit card issuers do not utilize arbitration clauses, and by the end of 2010, the majority of credit card debt was not subject to such an agreement. Likewise, while the use of class waivers is widespread in arbitration clauses, most clauses lack the sorts of unfair procedural terms for which arbitration is often criticized. The upshot of these and other findings is that consumers, in some respects, have more choice in their contracts than the literature suggests. Our work also responds to the suggestions of some scholars that businesses favor arbitration clauses in their consumer contracts but not their business-to-business agreements. On the contrary, our research suggests that the difference may not be as dramatic as previous research suggests. These results hold important implications for ongoing policy debates, including the work of the newly minted and controversial Consumer Financial Protection Bureau (“CFPB”). The CFPB has been charged with studying and, if appropriate, regulating the use of arbitration clauses in credit card agreements. Our findings signal a note of caution and suggest that a blanket prohibition on the use of arbitration clauses would be difficult to defend under principles of administrative law.

Accounting for Time: A Relative-Interest Approach to the Division of Equity in Hybrid-Property Homes Upon Divorce

Lisa Milot — Thu, 01 Sep 2011 13:51:40 PDT

Even in these troubling economic times, homes are the most valuable asset many Americans own. In many instances, these homes were purchased prior to marriage, with later mortgage payments made after the homebuyer married. On divorce, courts must divide the value of such a “hybrid-property” home into “separate” and “marital” shares prior to distributing it between the divorcing spouses.

Many courts have developed formulas for this purpose, with a goal of providing a “proportionate and fair return” on both the separate and marital investments in the home. Each of the formulas, though, ignores the timing of the investments, both in relation to other investments and relative to when the home’s changes in value occurred. As a result, the formulas fail to produce a division that is either proportionate or fair and, instead, systematically and invisibly transfer large amounts of wealth between divorcing spouses.

This Article argues that current approaches to the allocation of equity in hybrid-property homes upon divorce represent a misalignment of legal rhetoric and legal reality which must be acknowledged and resolved. Based on the predominant approach to the division of hybrid-property defined-contribution retirement plan accounts, the Article develops a “relative-interest” approach to dividing the equity in hybrid-property homes and shows how the approach can be applied in practice. Of particular importance, the Article highlights how, as technology develops, existing rules must be reassessed to ensure that they remain properly structured to address the goals they profess to advance.

A Tale of Prosecutorial Indiscretion: Ramsey Clark and the Selective Non-Prosecution of Stokely Carmichael

Lonnie T. Brown Jr. — Mon, 13 Dec 2010 13:05:39 PST

During the height of the Vietnam War and one of the most volatile periods of the civil rights movement, then-Attorney General Ramsey Clark controversially resisted intense political pressure to prosecute Black Power originator and antiwar activist Stokely Carmichael. Taken in isolation, this decision may seem courageous and praiseworthy, but when considered against the backdrop of Clark’s contemporaneous prosecution of an all-white group of similarly situated anti-draft leaders (the so-called Boston Five), his exercise of prosecutorial discretion becomes suspect. Specifically, the Boston Five were prosecuted in 1968 for conspiracy to aid and abet draft evasion, a charge for which the evidence against Carmichael seemed markedly stronger. This article critically examines the propriety of Clark’s decision to forego the prosecution of Carmichael, and concludes that it was most likely the product of an earnest and unwavering commitment to the civil rights movement, generally, and the legally oppressed, specifically. Though objectively improper when analyzed alongside the prosecution of the Boston Five, Clark’s chosen course, which I ascribe to the exercise of “prosecutorial indiscretion,” is virtually impossible to condemn given his worthy motives and the singularly complex sociopolitical milieu within which he had to operate.

Being Smart (Growth) About Justice: Can the Obama Administration Undo Decades of Environmental Injustice Via Smart Growth?

Jamie Baker Roskie et al. — Wed, 24 Nov 2010 13:51:25 PST

This article focuses on the Obama administration's potential impact on environmental justice issues, particularly through EPA's Smart Growth program and partners. The article will also consider whether the new emphasis at EPA might be helpful in local communities, including UGA Land Use Clinic's client Newtown Florist Club of Gainesville, Georgia.

Entity and Identity

Usha Rodrigues — Wed, 24 Nov 2010 13:48:43 PST

The function, indeed the very existence, of nonprofit corporations is under-theorized. Recent literature suggests that only preferential tax treatment adequately explains the persistence of the nonprofit form. This answer is incomplete. Drawing on psychology’s social identity theory, this Article posits that the nonprofit form can create a special "warm-glow" identity that cannot be replicated by the for-profit form. For example, a local nonprofit food cooperative is selling more than the free-range eggs or organic strawberries that Whole Foods and other for-profits market so effectively. The co-op offers community participation and an investment in local farms, a distinctive ethos that is incompatible with the profit motive. Ascribing a special meaning to the nonprofit form allows us to view afresh a variety of issues regarding the appropriate legal treatment of nonprofits.

Awakening the Press Clause

Sonja R. West — Wed, 24 Nov 2010 13:44:57 PST

The Free Press Clause enjoys less practical significance than almost any other constitutional provision. While recognizing the structural and expressive importance of a free press, the Supreme Court has never recognized explicitly any right or protection as emanating solely from the Press Clause. Recently in the Court’s Citizens United decision, Justices Stevens and Scalia reignited the 30-year-old debate over whether the Press Clause has any function separate from the Speech Clause. The primary roadblock to recognizing independent meaning in the Press Clause is the definitional problem - who or what is the “press”? Others have attempted to define the press, but the ubiquitous instinct toward constitutional overprotection has resulted in overly broad definitions that include potentially everyone. These over-inclusive definitions have failed because they attempt to transfer our constitutionally overprotective approach to the Speech Clause to the Press Clause. The net result has been, ironically, fewer constitutional press rights rather than more. This article attempts to break that cycle by arguing that the way to give long-overdue meaning to this important piece of constitutional text is to embrace press exceptionalism through a narrow definition of the “press.” By adopting an overly protective approach to the Press Clause we have been sucked into a constitutional feedback loop - an expansive definition of the press means virtually complete overlap between press and speech and thus no meaningful way to interpret the Press Clause. Awakening the Press Clause, therefore, requires a definition of the press that is sufficiently narrow. This article furthermore submits that the definitional problem is manageable because line-drawing perfectionism is not required thanks to the fallback protections of the Speech Clause.

Trademark Infringement, Trademark Dilution, and the Decline in Sharing of Famous Brand Names: An Introduction and Empirical Study

Paul J. Heald et al. — Wed, 24 Nov 2010 13:18:46 PST

This article provides an introduction to the study of brand-name sharing, and presents results from an empirical study of sharing rates among 131 famous brand names from 1940 through 2010, conducted through an examination of business names in the white pages telephone directories of Chicago, Philadelphia, and Manhattan. Perhaps the most dramatic finding of the study is that independent uses of the 131 brand names – that is, uses of those names by businesses other than those that made the names famous – have declined from 3000 to 1380 between 1960 and 2010, a 54% drop. The article then assesses potential causes for that decline. We evaluate five potential nonlegal factors, including economic changes, family migration, decreased attractiveness of particular famous brands, changes in the popularity of business name types, and changes in cultural naming patterns. It then considers evidence that changes in trademark infringement and dilution law underlie some part of the decline. The article concludes that both legal and non-legal factors have likely played a role.

The Structural Causes of Mortgage Fraud

James C. Smith — Wed, 24 Nov 2010 12:46:19 PST

Mortgage fraud, often a violation of federal and state criminal statutes, covers a number of different types of behavior, all of which have the common denominator of conduct that has the intent or effect of impairing the value of residential mortgage loans. Mortgage fraud has become prevalent over the past decade and shows no signs of diminishing despite the collapse of domestic housing markets during the past two years. This paper analyzes the complex relationships between prime mortgage loan markets, subprime markets, and various types of mortgage fraud. This paper concludes that the root causes of mortgage fraud are associated with the core institutional and structural components of mortgage markets, which cut across all types of residential mortgage products. The organizing principle is the historical evolution from proximity to distance within the mortgage market, which is explored along three axes. First, geographical distance between lenders and borrowers has replaced geographical proximity. The mortgage market is national, with local lending institutions no longer making a significant proportion of the loans that are originated. Second, transactional distance has replaced transactional proximity. Lenders and borrowers have little direct contact; instead intermediaries such as mortgage brokers, appraisers, insurers, and closing officers, separate the principals. Third, financial distance has replaced financial proximity. Previously both borrowers and lenders had significant financial interests in the mortgage loan transaction. The borrower had equity in the property, and the lender held the loan in its portfolio. Presently many borrowers have no equity (or negative equity) in their homes, and due to the securitization of loans through the secondary mortgage market, few originating lenders retain a stake in the loans they create. Reforms that could serve to reduce borrower-lender distance or to ameliorate its effects include the fashioning of better closing procedures for verifying borrower identity, providing a premium for community-bank loans to local borrowers, making originating lenders liable for all misconduct by appraisers, requiring significant down payments for borrowers, and allowing secondary market purchasers full recourse against originating lenders for losses caused by borrower defaults.

A Transaction Costs Theory of Patent Law

Paul J. Heald — Thu, 29 Jul 2010 07:51:15 PDT

Patent law is under-theorized in the sense that the predominating incentive-based justifications cannot by themselves adequately explain empirical evidence on patenting gathered by research economists. This article provides an alternative justification for patent law based on private transaction costs savings offered by patent law in comparison to alternative options available to those who wish to exploit information assets. In particular, it identifies striking parallels to corporate law as described in recent scholarship and shows how patents act as affirmative asset partitions, ameliorate significant team production problems, and encourage technology transfer. Even if the patent system provides no significant incentives to invent, it can be explained and justified in terms of transaction costs savings alone.

American Corporate Copyright: A Brilliant, Uncoordinated Plan

Paul J. Heald — Thu, 29 Jul 2010 07:51:14 PDT

This essay takes three quick looks at American copyright law through the eyes of an observer from an undeveloped economy. Look One focuses on Eldred v. Ashcroft and recent legislative initiatives that give the appearance that American copyright law is completely dominated by corporate interests. Look Two emphasizes the huge holes in American copyright law that allow users and competitors to engage in massive copying, e.g. fair use principles, the Altai and Feist tests, contributory liability and exhaustion rules, and various other statutory exceptions to liability. Look Three points out that these exceptions keep American consumers quiescent by keeping the cost of copyright protection here relatively low. This allows the U.S. government to pursue a TRIPS+/Berne+ worldwide copyright strategy without a hint of domestic interference. The essay concludes by suggesting what developing countries can learn from the U.S. approach.

An Inconsistency in SEC Disclosure Requirements? The Case of the 'Insignificant' Private Target

Usha Rodrigues et al. — Thu, 29 Jul 2010 07:51:13 PDT

Although the SEC's main charge is to ensure the disclosure of material information, the SEC has not always consistently defined materiality. We show that acquisitions of privately-held targets classified as "insignificant" by the SEC appreciably affect market prices, and therefore are "material" by the SEC's definition. We find significant returns in transactions with targets as small as 2% -- compared with the SEC's disclosure threshold of 20% -- of the acquirer. Further, an average of 19 undisclosed private acquisitions per year exceed the median IPO value in the same year for our sample period. However, because the SEC deems these transactions insignificant, information like target financial statements remains undisclosed to the market. Disclosure rules regarding target financial statements thus create a regulatory disconnect, in which information that is "material" is "insignificant" and therefore not disclosed.

Capital Gains and Losses, Allocable and Apportionable Income, and General Electric Co. v. Iowa

Walter Hellerstein et al. — Thu, 29 Jul 2010 07:51:13 PDT

In this report, the authors review the interaction of the federal rules, with which most states conform, that limit the corporate capital loss deduction to capital gains for the tax year or to years to which the loss may be carried back or forward, with the constitutional and statutory rules for allocation and apportionment of income - rules that have no direct counterpart at the federal level. They focus on the recent case of General Electric Co. v. Iowa.

Roles of States/Provinces in Taxation in the Canada/U.S. Context

Walter Hellerstein — Thu, 29 Jul 2010 07:51:12 PDT

While my focus will be on U.S. specifics, I believe that what I have to say is relevant to the Canadian situation because I will focus on what happens when we start to have cross border transactions in the international context and the sources of friction created by sub-national governments in the tax arena.

I believe there are three structural sources of friction that arise out of sub-national taxing power in a federal system.

The first source of friction is the existence of different rules at the national and sub-national level. For example, if you have a different substantive rule as to what creates a sufficient establishment or nexus in order to tax, you are going to have a problem with the administration of inconsistent jurisdictional rules.

The second source of friction is different restraints on sub-national and national behavior. Now, these first two points overlap, but they are different. Let me explain. You can have different sub-national and national rules, which may well be an irritant, but they may not offend any norm of international behavior. You can also have the same rule nationally and sub-nationally, for example, a rule that allegedly discriminates against cross-border transactions for e-commerce, but you might have a restraint at the international level, e.g., a restraint involving national treatment that does not apply at the sub-national level. These are two analytically different sources of friction, although they do overlap.

The third source of friction is that there tend to be more sub-national governments than national governments. The mere existence of a multiplicity of rules itself causes friction.

Those are three sources of friction on which I want to focus.

The Seductive Comparison of Shareholder and Civic Democracy

Usha Rodrigues — Thu, 22 Jul 2010 08:17:42 PDT

This Comment briefly describes democracy in the political and corporate world, and goes on to discuss how seemingly similar kinds of democracies exist in both spheres. It then takes the common comparison of shareholder democracy and political democracy in a new direction by exploring the parallels between the Electoral College and the board of directors, examining both institutions in light of the differences between nation and corporation and their contrasting histories. Both are "once removed" representative democracies: both systems only give voters the right to vote for representatives who then select the individuals who actually govern. The Comment then steps back from this analogy and argues that comparisons between the corporate and civic polities, while intellectually tempting, ultimately falter because participation in a corporation fundamentally differs from participation in a nation. It concludes that the Electoral College/board of directors comparison, like the comparison of the two democracies, is tantalizing but ultimately of limited value given the distinctive roles that each institution, and each polity, play in the modern world.

Congressional Authority Over Intellectual Property Policy After Eldred v. Ashcroft: Deference, Empty Limitations and Risks to the Public Domain

David E. Shipley — Thu, 22 Jul 2010 08:17:42 PDT

It is appropriate to ask whether there are any meaningful limits on the Supreme Court's deference to Congress in setting intellectual property policy after Eldred v. Ashcroft given the Court's statements about the authority of Congress under the Copyright Clause, its treatment of several prior statements on intellectual property policy and the Court's general reluctance to strike down legislation. Does Congress enjoy a carte blanche to legislate on intellectual property matters? Has the Court backed away from its posture regarding copyright law expressed in Feist to return to a relationship with Congress on copyright policy that is deferential to the point of servility?

The answer to these questions might be "yes." The Supreme Court's deference to Congress coupled with its reliance on the unbroken history of congressional practices granting term extensions and statements regarding differences between the patent and copyright monopolies have been of critical importance in recent decisions upholding legislation that provides for the restoration of copyright protection for certain works by foreign authors that had entered the public domain. Another court, relying heavily on Eldred, upheld the Copyright Renewal Act and the Berne Convention Implementation Act as well as CTEA. Appropriate deference to Congress also played an important role in several decisions interpreting anti-bootlegging legislation. The lower courts are split on whether this statute violates the Copyright Clause's "limited times" and "writings" limitations, and over whether it can be upheld under the Commerce Clause or the Treaty Power.

This article discusses several post-Eldred decisions, the expansive authority of Congress under the Copyright Clause, the meaning of the clause's limitations in the face of the Court's deference to congress, and the significant risk of encroachment on the public domain resulting from Congress' exercise of its power under the Copyright Clause. The post-Eldred decisions show that it may not be necessary for Congress to turn to the Commerce Clause or the Treaty Power in order to enact legislation that avoids limitations in the Copyright Clause. Given Congress' exercise of general legislative powers, the Court's deference to Congress' judgment in exercising its power under the Copyright Clause and its historic reluctance to strike down intellectual property legislation, the clause's limitations on congressional authority are becoming meaningless and this puts the public domain at risk.